Priya, a young engineering graduate, has been watching the craze for cryptocurrency investing boom in India. The popularity and growth of cryptocurrencies such as Bitcoin, Ethereum, Litecoin, Tether, Dogecoin have compelled investors and sceptics to take a second look. Around 15 million Indians are said to have invested in private crypto assets. Young investors like Priya are excited about the prospects of strong returns. She is planning to open a crypto trading account. However, she would like to understand each and every aspect of the crypto market before she starts investing in earnest.
A cryptocurrency (or crypto) is a non-physical, digital and decentralized currency that is issued by private systems and remains out of the purview of the government. It is a peer-to-peer system that can enable anyone anywhere to send and receive payments. Priya will need to store her cryptocurrency in a digital wallet. There were over 4,000 different cryptocurrencies in circulation worldwide, including the market giants Bitcoin, Ethereum, Litecoin, and Dogecoin. Much of the interest in these unregulated currencies is to trade for profit, with investors/speculators at times driving prices skyward.
Cryptocurrencies work using blockchain technology, a decentralized technology spread across many computers that manages and records transactions. Part of the appeal of this technology is its security. Transactions cannot be altered or deleted and are hard for hackers to tamper with. In addition, transactions require a two-factor authentication process. The investor can add more and more digital transactions and the blockchain gets updated automatically.
In order to trade in cryptos, Priya must open a crypto trading account on a cryptocurrency exchange. A cryptocurrency exchange, such as Coinbase, helps in the trading of cryptocurrencies in various currencies and also provides wallet services. It acts as a broker and facilitates transactions between the buyers and sellers, while their main sources of revenue are transaction fees and commissions. Once the account is opened and KYC formalities are completed, Priya can deposit money in the cryptocurrency exchange via card transactions or direct bank transfers to purchase cryptocurrencies, against a fee.
While crypto trading is the current rage and may even yield potentially high returns, Priya must understand that cryptocurrency is an incredibly speculative and a volatile buy. The market is still in its infancy. Investing in something that’s new comes with challenges, so she must be prepared for ups and downs, including some dramatic swings. If her investment portfolio or risk appetite can’t handle that, cryptocurrency might not be a wise choice for her.
(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)